New Issuance Analysis - Plus Products

by: Honghao Sun, CFA

Summary

Plus Products obtained listing with CSE through IPO instead of RTO.

Plus Products incurred relatively low agents' fees on IPO financing.

Plus Products applied for patent protection and trademark protection.

Plus Products' Executive Chairman has long-term capital market experience.

Plus Products' current valuation at about C$130 million is relatively low compared to other cannabis companies in California.

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The common shares of Plus Products Inc. ("Plus Products") with ticker symbol, PLUS, have been approved for listing on the Canadian Securities Exchange ("CSE") on October 25, 2018.

The momentum for the cannabis industry has been shifting from Canadian licensed producers to US based multi-state operators. Many large multi-state operators such as Curaleaf, Acreage Holdings, and Cresco Labs are seeking to go public in Canada with multi-billion dollar valuations, which have been creating some hype. As a result, some solid US based cannabis business may go under the radar. One of these undercovered US based cannabis business I think is Plus Products Inc. ("Plus Products"). Plus Products is worth considering for your investment because of a few factors discussed below, including efficient use of capital market, proven market share, and reasonable executive compensation.

Company Overview:

Plus Products Inc. ("Plus Products"), through its wholly-owned subsidiary, Carberry, LLC ("Carberry"), operates as a branded cannabis products manufacturer with operations in the State of California in the United States. Its products consist of cannabis-infused edibles, which Plus Products sells to both the regulated medicinal and adult-use, or recreational, markets. Carberry holds a temporary license issued by the State of California Department of Public Health, Manufactured Cannabis Safety Branch pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act to extract and manufacture cannabis-infused products at its facility located in Adelanto, California. Plus Products has arrangements with licensed distributors to sell products under the PLUS brand to about 200 licensed dispensaries and delivery service customers. Total number of shares outstanding at the time of listing is 33,061,502.

Brief timeline:

On April 7, 2015, Plus Products Holdings Inc. (Delaware) ("Plus Delaware") was incorporated.

On October 25, 2015, Plus Delaware entered agreement to finance Plus Products California Cooperative's ("PPCC") operations in California.

On July 13, 2017, Carberry was incorporated in the State of California, solely owned by Plus Products' CEO, Jacob Heimark.

On December 1, 2017, Plus Delaware acquired Carberry from Jacob Heimark for US$1.

On December 31, 2017, Plus Delaware purchased all net assets from PPCC in settlement of loan owing from PPCC. PPCC ceased to exist immediately after.

On April 11, 2018, Plus Products Holdings Inc. (Nevada) ("Plus Nevada") was incorporated.

On April 25, 2018, Plus Delaware and Plus Nevada merged, where Plus Nevada became the sole member of Carberry.

On July 24, 2018, Plus Products acquired Plus Nevada, ready for CSE listing.

Source: Plus Products Inc. Long Form Prospectus

Pros to consider:

Plus Products Inc. conducted an initial public offering (the "IPO") to become listed on the CSE on October 25, 2018, different from the reverse takeovers commonly seen as the approach to go public in Canada for US based cannabis companies, as a result saving on listing fees and dilutions to current shareholders. Plus Products disclosed in its Long Form Prospectus that the CSE listing fee is only C$75,000. Below table compares between the listing fees paid by cannabis companies that recently went public through RTO and the listing fees paid by Plus Products Inc. It is a tremendous amount of savings by listing through IPO for Plus Products that can be used elsewhere to pursue value for shareholders.

US Based Cannabis Company that Recently went public through RTO with CSE RTO Listing Cost (Approximation) Plus Products IPO Listing Cost
Green Thumb Industries Inc. (OTCQX:GTBIF) C$3,700,000
MedMen Enterprises Inc. (OTCQB:MMNFF) C$6,370,000
Trulieve Inc. (OTCPK:TCNNF) C$1,200,000
Average C$3,750,000 C$75,000

Sources:

Trulieve Listing Statement Pro Forma Balance Sheet

Green Thumb Industries Listing Statement Pro Forma Balance Sheet

MedMen Enterprises Inc. Audited Financial Statements for the Year Ended June 30, 2018

Plus Products negotiated with the agents for only 6% of fees on proceeds received from non-President-List subscribers and only 2.5% of fees on proceeds received from President-List subscribers. Based on the Long Form Prospectus filed on Sedar, total proceeds of C$20,000,000 were raised at the IPO at a price of C$3.25 per offered share with total fees to the agents of C$972,500. As a result, C$13,500,000 is from Non-President-List subscribers and C$6,500,000 (33%) is from President-List subscribers, which shows that Plus Products has a strong ability to finance within its own network.

Below table summarizes the agents' fees on financing in the current market environment in the US cannabis industry. Efficiency in capital market brings a significant role on future success in the US cannabis market. Plus Products has demonstrated so far its efficiency in the use of capital markets to pursue its corporate strategy.

Company Financing Amount Agents' Fee % on Non-President-List Agents' Fee % on President-List
Trulieve Inc. C$65,565,000 6% 3%
Green Thumb Industries Inc. C$112,840,000 8% 4%
MedMen Enterprises Inc. C$143,000,000 8.1% N/A
iAnthus Capital Holdings, Inc. (OTCQX:ITHUF) C$30,000,000 7% 3.5%
DionyMed Holdings Inc. C$25,000,000 7% 3.5%
Plus Products Inc. C$20,000,000 6% 2.5%

Sources:

iAnthus Short Form Prospectus

DionyMed Holdings Inc. Press Release

Plus Products has applied for patent protection on its cannabis oil processing method, which is unique in the cannabis industry. The application is currently under review in the United States, Canada, Australia and European Union, which are all potential markets for Plus Products' products given the cannabis legalization in progress in these regions. Plus Products also registered for PLUS trademark in the State of California.

Plus Products already generated substantial revenue of US$2,450,335 for the 6-month period from January 1, 2018 to June 30, 2018. 241,000 of the total units sold of 382,000 is from the second quarter in 2018 based on Plus Products' investor presentation, representing an approximately quarterly sale in Q2 2018 of US$1,546,000. At the current quarter-over-quarter growth rate in 2018, Q3 2018 sale is on track to be US$2,642,000. In that case, Plus Products' quarterly sales would almost be among the top 28 revenue generating publicly traded cannabis companies. In addition, Plus Products claims to currently hold 5.31% market share from its branded products in California. At this market share, Plus Products can potentially generate US$265,000,000 in sales in 2019 in California alone.

Sources:

News Cannabis Venture

Plus Products Investor Presentation

Mr. Craig Heimark, CFO and Executive Chairman to Plus Products, brings many years of experience and network in the capital markets given his previous roles as Chief Information Officer at UBS and Board Member at Deutsche-Borse AG. The access to capital markets for financing is critical for US based cannabis companies.

Mr. Jacob Heimark and Mr. Craig Heimark, CEO and CFO to Plus Products, respectively, only have base annual salary of US$175,000 and US$250,000 for 2018 (none for 2017), which seems low given their role and years of experience. With their equity ownership in Plus Products of 10.48% and 11.52%, respectively, Mr. Jacob Heimark and Craig Heimark appear to mainly seek return from their equity ownership. Below table summarizes CEO and CFO total compensation for some US based cannabis companies. Trulieve Inc.'s executives are located in Florida, while iAnthus' executives are located in Toronto; therefore, these two companies' compensation for executives may not be comparable with Plus Products, whose executives are located in California. Overall, Plus Products' compensation for executives is relatively low compared to other US based cannabis companies.

Company (Year with Data) CEO CFO
Trulieve Inc. (2018) C$195,000 C$260,000
MedMen Enterprises Inc. (2018) C$1,950,000 (only base salary) C$975,000 (only base salary)
Green Thumb Industries Inc. (2018) C$448,000 C$390,000
CannaRoyalty Corp. (OTCQX:ORHOF) (2017) C$933,000 C$421,000
iAnthus Capital Holdings, Inc. (2017) C$359,000 C$287,000
Plus Products Inc. (2018) C$341,000 C$487,000

Sources:

CannaRoyalty Corp. Management Information Circular

iAnthus Management Information Circular

Cons to consider:

Plus Products currently only operates in the State of California, which is very competitive given thousands of licenses issued to date and hundreds of brands in the market. By the end of 2017, there are over 200 edible brands in California. It can be very difficult to differentiate among competitors and capture market share.

Source: Plus Products Investor Presentation

Conclusion:

Plus Products is new as a publicly traded US based cannabis company. With many multi-state operators in the US cannabis industry announcing to go public in CSE recently such as Cresco Labs, Columbia Care, Acreage Holdings and Curaleaf, Plus Products's CSE listing may well be under covered. However, given Plus Products' many well known brands in California, substantial revenue generated so far in 2018, efficient use of capital market, relatively low valuation, I hope to use this article to bring more attention to this company. Although cannabis still can't be transported across states in the US, Plus Products' well established edible brands and manufacturing formulas can easily be replicated in multiple states to establish itself as one of the large multi-state operators. Plus Products' common shares started trading at C$3.50. As of Monday, October 29, 2018, its share price went up to as much as C$4.50 at the daily trading peak. In particular, given the US mid-term election coming soon, the election results may create additional momentum to attract investors for US based cannabis companies.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PLUS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.